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Internet
search firm Google can do no wrong. It is Amazon, eBay, Reuters,
and Britannica all in one. It has low-end disruptive technology,
a popular primary-color brand, an advertising model that works,
and profits-nine quarters in a row. It entered a cluttered space
late and still cleaned up. It even writes better modern poetry
than humans. For these and other virtues, columnist Thomas Friedman
asked, "Is Google God?"
The world's expectations of Google, however, are grander still.
In an IPO wasteland, where offerings this year hit a 29-year low,
some in Silicon Valley view Google's suspected 2004 public debut
as a second coming. A $20 billion IPO could reinvigorate the Valley
and part the waters for a new round of Internet capital. (Not
to mention single-handedly salvage a nearly wiped-out $2 billion
venture fund for top-flight Kleiner Perkins.) Still not satisfied,
some are hoping Google uses its exalted platform to transform
the entire hierarchy of the closed and clubby IPO system.
Why has Google been so successful where other dot-coms failed?
In an "information economy" filled with crushing amounts
of complex data, the companies that best filter the signal from
the noise will earn the spoils. Google is simply the best at finding
relevant needles in the data haystack. A new study from Berkeley
shows that in 2002 humans and machines created 5 exabytes (10
to the 18th) of new, unique, storable data. That's the equivalent
of 500,000 Libraries of Congress generated in one year. Increasingly
this diverse information is finding its way onto the Net, giving
Google plenty to do for years to come.
Google also wins because of speed. It was built for narrowband
Internet connections, and that's important in narrowband America.
(Thanks to our backward FCC, pro-technology South Korea now has
40 times our per capita bandwidth.) Google's site contains just
35 words and the corporate logo. Search results and ads are similarly
all text, guaranteeing quick results, every time. The relevance
of the ads-ensured by unique algorithms-more than makes up for
the lack of flash and flair.
Activity in the sector both reinforces Google's strategy and portends
greater competition and even peril. Last week Amazon introduced
"Search Inside the Book," a standard feature that takes
your phrase and finds and displays scanned pages from more than
120,000 books. Amazon's entire catalog of several million books
will soon be searchable online. Meanwhile, fellow Seattle giant
Microsoft will embed powerful search features in its next operating
system, code-named Longhorn. Even as it seeks to emulate Google's
functionality, Microsoft recently met with Google to explore a
partnership or even an acquisition. Google is said to have resisted,
but CEO Eric Schmidt must replay the Netscape case study in his
mind every day.
Google keeps everyone on their toes, including Wall Street. All
the usual banking suspects are vying to underwrite Google's IPO,
but founders Larry Page and Sergey Brin are said to be contemplating
a Dutch auction of shares, rather than the traditional institutional
allocation process.
The auction idea first surfaced in 1999 as the brainchild of Hambrecht
& Quist founder Bill Hambrecht. He saw tens of billions of
IPO dollars being "left on the table," Wall Street insiders
pocketing much of the capital that could have gone to upstart
companies. In 1999, the average first day appreciation of IPO
stocks was 71%, and the average return for the year was 276%.
Bankers were setting initial prices artificially low, allocating
the underpriced shares to "friends and family," and
selling after the first day price "pop," yielding some
$60 billion of extraneous cash in 1999 and 2000 alone.
Hambrecht also saw that most investors were barred from the IPO
process. Under a new company, WR Hambrecht + Co., he sought to
empower the masses by offering both access to shares and the ability
to set the price via competitive auction, not the whim of Wall
Street. By eliminating first-day flipping by disinterested Wall
Streeters, volatility would be reduced.
Hambrecht was about to clean up the IPO process far better than
Sarbanes, Oxley, or Spitzer ever could. In early 2000, my employer
was even contemplating a Hambrecht IPO. Then the market crashed,
preventing Hambrecht from testing his model. Instead of Hambrecht
the entrepreneur disrupting and reforming the system with a better
product, we got "scandals," regulatory boons for accountants
and lawyers, and lawsuits. IPO king Frank Quattrone was tried
for a solitary, ambiguous e-mail advising coworkers to follow
company policy.
What if bankers had set the initial prices of dot-com offerings
"correctly," meaning at their astronomical first day
closing prices? The bankers in retrospect might have been even
more reviled than they are today, charged not just with milking
the bubble but creating it. The fact that the Wall Street bankers
are in a lose-lose position here does not undermine the Hambrecht
auction model but reinforces its validity. Hambrecht's auctions
are part of an inevitable if gradual disaggregation of many of
the human functions of Wall Street, from the NYSE specialist system
to that last bastion, the bond market.
Google alone cannot ignite Internet innovation and IPOs. Only
the advent of real broadband can do that. But what better time
to inaugurate a new populist financial architecture than with
the IPO of the most popular company in the world.
Bret Swanson is executive editor of the Gilder Technology
Report and a senior fellow at Seattle's Discovery Institute.
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